The Porter’s Five Forces framework is a useful tool to evaluate the level of attractiveness of an industry by considering the external environment that it operates in. Focusing on the airlines industry in the US, we can apply the framework as follows:
Threat of new entrants
The airline industry requires large initial investment and has a long learning curve. Apart from acquiring high-cost assets such as planes and skilled staff, the company also needs to gather the necessary permissions, obtain parking and docking space at various airports, market the service extensively to ensure consumers are willing to travel by a new, unknown airline. Also, there are significant exit barriers in the industry due to stringent government regulations. The highly fluctuating nature of profitability acts as a deterrent as well.
However, with the availability of a huge line of credit and a marketable brand name via other businesses, companies venture into the airline industry. Planes are available on lease and bought second-hand as well. Starting out in a specific region is permitted and is usually used as a strategy by entrants, reducing initial cost and complication.
Bargaining Power of Suppliers
The airline industry has two major airplane suppliers: Airbus and Boeing. Due to this limited number, they control the prices and hold immense power. Fuel is also supplied by only a handful of sources. The number of airports servicing any particular area isn’t high either, narrowing the options for the airline companies. The other high cost input is labor, which is powered by a labor union.
Threat of Substitutes
Potential travelers have the ability to choose over different modes of transportation: cars, buses, trains, boats. However, there is an associated switching cost. Most often this cost is that of time. Thus, consumers might choose other methods of transportation for shorter distances.
Technological communications such as WebEx, Skype and other video-conferencing tools are slowly becoming a substitute to airline travel, especially for business meetings.
Frequent flier programs lower the threat of substitutes since establishing new benefits for any airline causes the buyer to lose miles he/she might have accumulated with another airline.
Bargaining Power of Customers
Customers have low switching costs between airlines. They choose airlines based on cost and availability. Each airline has a niche which attracts customers. The burst of online portals provides customers with various airline tickets, competing on price and flight timings. Example: SkyScanner.com, Expedia.com
Intensity of Competitive Rivalry
The airline industry is extremely competitive in its nature due to time-to-time entry of low cost carriers and tight regulation due to the concern of safety which increases operational expenses. The presence of low-cost carriers has brought down prices by a large extent, consequently driving down margins. The number of competitors remains stagnant in the market due to high fixed costs. There is very little differentiation between the available choices and loyalty programs such as flyer miles and benefits are rarely a preference over factors such as available flight times, prices and routes.
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